Keating: Government officials to blame for this mess

Did you ever notice how some politicians proclaim they don’t play the “blame game” or point fingers? Of course, others relish blaming so-called greedy, evil business for all our ills. That’s hot in Congress these days.
But such politicians usually want to divert attention from their own culpability in whatever mess needs cleaning up. After all, ...

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A more complete story is looking at #1 allowing financial institutions to more than double the amount of leverage they could make off their investments that got us into the financial meltdown, and #2 the notion that “spreading the risk” thru CDOs etc was lowering the risk rathering than actually amplifying it (see pt #1).

This article gets to the heart of the matter. Dee, if you re-read the article, you’ll see that government changing rules such as lending standards gave firms the opportunity to make many of the bad choices that have led us to this mess. Your comments only prove the point of the author.

Bad mortgages are not the tip of the iceberg, they are the epicenter of this financial implosion. What happens when you cut up hundreds of billions of dollars of bad mortgages and sell them as low risk investments? What happens when firms make bets on those assets and over-leverage themselves as a result?

Really, prove to me that bad mortgages are the tip of the iceberg. Unfortunately, much of the current crisis is the direct result of bad lending and the subsequent choices made based on a mis-understanding of the risk involved.

@ Reason: the “loosening of lending standards” is a myth. The “government” had nothing to do with it. It was the NON agency loans that blew up the economy, not the Fannie and Freddie ones. Proof is a default rate that is still under 3% for these loans. It was non-regulated lenders- like New Century Financial and American Home Mortgage that wrote these toxic loans loans fueled by hedge fund money. Don’t even listen to anything Keating says. He is a demagogue, not an economist, just as Sowell is.

I didn’t have to read Keating to know about the government’s responsibility for loosening credit standards. That is common knowledge. Does the general public really have such a short-term memory? The primary source of the current crisis is not a mystery, and until today, I had never even read Keating. I already knew, as do many others, about the sub-prime mortgages encouraged by the government through fannie, freddie, and others.

Wake up and stop drinking the cool-aid. Government is just as much to blame as corporate America.

@ Reasin: you are dead wrong. Fannie and Freddie did not write the toxic mortgages you are talking about, and you don’t know underwriting from underwear. Again: it was chiefly the NON AGENCY loans that fueled the crisis. Fannie and Freddie do not do liar loans, and in fact, their underwriting standards are quite strict and their default rates, even in this debacle, are quite low. Talk about “drinking the cool-aid.” This slander comes from Conservative websites that no nothing about this subject.

If that idiot Bush had seen the amount of leverage being created through sub prime paper (not agency paper) a lot of our headaches never would have happened. Of course, the government isn’t good at anything, except relying on it for national defense, which should be outsourced to India

“It is clear that Fannie and Freddie are the remaining source of stability and prudent underwriting practices among financial intermediaries,” Sanders said. “It is their willingness to continue to purchase conforming loans that is keeping the U.S. housing market afloat.”

Finance Professor Herbert Kaufman holds the same view. “Fannie and Freddie haven’t been involved in subprime mortgages — those with all the defaults, the real source of the market crisis. Fannie and Freddie, instead, have mainly bought prime mortgages, with strong credit standards and fairly strict lending requirements. Even in this bad mortgage market, the default rate on those prime mortgages is reasonable based on historical precedent.

In fact, Kaufman said, Fannie Mae and Freddie Mac have weathered worse situations. “In the 1980s their losses actually exceeded their capital. Yet they weathered that situation without talk of government help,” he said.”

Enough is enough. You are clearly short-term in your view of the current crisis. Furthermore, you revealed your political bias by blaming the crisis on Bush (blaming an economic crisis on the most recent president is something that people with financial backgrounds (I have a Masters, mind you) find quite ignorant). I never revealed my political affiliation, so I’m not sure why you want to make this argument a conservative versus liberal issue.

I’d find you more info., but I am done wasting time on you. You see economics according to your political bias rather than the facts.

Oh, and yes, the article is an opinion piece, but the professors points have merit. And, by the way, I never said that Fannie and Freddie were entirely to blame. Rather, they are one of the sources of the current crisis. Do you want someone to write you a 1,000+ page post on the sources of the current crisis? That’d be silly. Instead, I am focusing on an obvious area where government interference created significant problems for the American people.

Isn’t that the point of the article we both read and about which we are commenting?

By the way, your article doesn’t confirm your viewpoints at all. Are you seriously trying to say that because the government bailed out Fannie and Freddie, they are not responsible in anyway for the financial crisis? Of course, giving capital in a time of crisis can help to stabilize the capital markets. But, remember, the government bailed out Fannie and Freddie to help stabilize the markets. Why would they bail out Fannie and Freddi? They were UNSTABLE! Ha! Funny stuff.

But seriously, are you kidding?!

Why did you even post that blog from Reuters? It actually disproves your point.

It is hardly surprising that a Wall Street Journal opinion piece would slam the GSEs- they, along with the American Banker’s Association, have hated them for years and have stopped at nothing to discredit them. So much for the “Kool-Aid” epithet. Fannie and Freddie did not “demand” sub-prime, and the only thing you can hang on them is that towards the very end of the housing boom, they did purchase some sub-prime paper. By that time, the die was cast- and cast solid. Compared to the purchase and securitization of Sub Prime by Wall Street, they were minor players. F&F only got into sub-prime when they were losing a huge chunk in market share to the non-agency lenders. They played no role in the massive fueling by cheap credit and shaky mortgage products issued by the BANKS that created the crisis, as borne out by their STILL very low default rates compared to every other mortgage asset class.

Keating is just parroting what he’s read in his right wing echo chamber, as you are. (Reason Magazine, no doubt.)

As far as your “Sub-Prime” comment is concerned, it shows you know very little about the mortgage industry. Just because a borrower does not fit into GSE lending strictures doesn’t fate that borrower to default.

You can blame Alan Greenspan as well for encouraging borrowers to use ARM mortgages when he kept rates for so low for too long.

You have a strong distaste for facts. F&F is not the sole driving force behind sub-prime. However, they were part of the problem. That was my only real point in ever mentioning F&F to begin with. You know that, so stop harping on F&F and my example of them (stop taking it out of context).

You are fixated on F&F. Read my original post. I gave them as ONE example of where the government has interfered and it has brought negative market results.

Why are you SO fixated on F&F? It’s because you either didn’t read my post or can’t actually refute the logic of my first post.

You keep talking about conservative media and how I parrot them. Yet, I am not getting my facts from conservative media (WSJ does have some right leaning bias, but is generally considering quite objective when speaking about the economy EXCEPT for opinion pieces). Also, how can you criticize my use of WSJ when you used a Reuters blog? You can’t. I am at least honest enough to state it is an opinion article in my previous post. However, you showed no such honesty in your previous responses.

Also, please keep on topic. Now you are talking about Greenspan and Adjustable Rate Mortgages. Did I ever defend ARMs? I am quite against people using adjustable rates because of the inherent uncertainty involved. Your home should not be subject to a high degree of uncertainty. You should know what you are paying and when. Otherwise, you are making a bet with the most important asset most people will ever own. However, that’s my personal opinion. I realize that in some situations and ARM can be advantageous.

I am getting my info. from the facts and from my education and NOT some pundit, as you seem to be.

Max, you say F&F played no role? Then your point of view is part of an extreme minority. You are not some patron saint of mortgage or economic knowledge (you may know some about the mortgage industry, but you don’t seem to know much about the economy). Your denial of the impact of F&F and their contribution to the crisis is dumbfounding.

Also, I never claimed F&F to be the sole reason we are in this crisis (please, read my previous posts, which you obviously don’t read very carefully).

Max, here are some facts/points for you to consider. Try to actually read this (if you can):

FACTS/Points:
1. In 1995, GSE’s like Fannie started receiving tax incentives to buy mortgage backed securities (yes, even mortgage backed securities for people with low income and low credit).

2. In 1996, US Dept. of Housing & Urban Development (HUD) gave F&F the target of issuing 42% of F&F’s mortgage purchases to low income borrowers. By 2002, the target had reached 52%. Such a goal was based on government agenda, and NOT market forces.

Oh, by the way Max, F&F can issue mortgages they purchases. So, saying that they never wrote any sub-prime mortgages, while technically correct, is HIGHLY misleading. That’s like saying that a dealership it didn’t affect the number of cars on the road because it didn’t manufacture them.

4. F&F did not adequately assess the risk of the securities they purchased. Consequently, they fueled the crisis rather than slow it down. (This is NOT an opinion, this is a fact, look it up).

5. F&F had to slow down their mortgage purchases around the boom of sub-prime loans. Why? Their accounting shenanigans (don’t even try to argue that point with me, I have a Masters in Accounting and am an employee of one of the Big 4 accounting firms). As a result, the private sector was hit with most of the worst loans. Had they not had any accounting improprieties, they would have attempted to grow at a faster pace than they had. To do so, they would most certainly have had to purchase more loans around the boom in housing speculation.

6. F&F provided an “implicit guarantee” that they would provide government support. That guarantee fueled risk taking by private financial institutions.

7. As stated by USA Today, “Due largely to the implied government guarantee, they are able to raise money relatively cheaply by selling bonds to investors. The funds they raise are then used to buy home loans from mortgage originators such as banks, giving the lenders cash to make fresh home loans.” You see, Max, the funds raised by F&F end up eventually as mortgage purchases. Mortgage purchases eventually end up in the hands of banks. Money in the hands of banks eventually ends as loans to individuals and organizations, etc.

You see the connection that is made through purchases? Understand now? Or do I need to put it all in CAPS for you?

Max, you can argue all you want, but F&F had an impact and contributed to the crisis. They didn’t back most of the sub-prime, but they certainly helped to fuel the crisis.

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